Sole Trader: Do the Benefits Outweigh the Drawbacks?

When you’ve decided to start your own business, one of the first things to think about is how you’ll structure it. The most obvious way to do this is to operate as a sole proprietor. Because it is simple to set up, the sole trader structure is commonly used by businesses. However, it is critical to consider whether it is appropriate for your current situation as well as your future business goals. In this article we discuss the main benefits and drawbacks of operating as a sole proprietor, as well as alternative business structures you may want to consider.

What is a Sole Trader?

A sole trader is an individual who owns and operates a business. When you set up as a sole trader, the law considers you and your business to be one and the same. This means that you will completely own and control the business, as well as receive all of its income and profits. However, this also means that you are solely liable for all of the company’s debts and are personally liable for income tax on the money your company earns.

How Do You Set Up as a Sole Trader?

The process of establishing a sole trader business is extremely simple. You simply need to register your company with an Australian business number (ABN). Traders who establish a sole trading business with a TFN trade under their own name. If you expect to make more than $75,000 in a single year, you should also register your sole trader business for GST.

It is important to note that profits earned by a sole proprietorship are treated as personal income. This means that sole proprietors must accurately report business income after expenses and pay income tax using their personal TFN. Sole proprietors must follow the same income tax rules as everyone else.

Sole traders are also eligible for the tax-free threshold if they are Australian residents.

Individuals who run a business in this manner are responsible for organising their own superannuation. If you employ individuals, you must make superannuation contributions for qualifying employees. You may be eligible to claim a tax reduction if you arrange your own superannuation payments.

If you prefer to conduct your business publicly under a trading name rather than your personal name, you must register your selected business name with ASIC. Furthermore, if you desire exclusive use of that business name since it is important to your brand, you should register it as a trade mark with IP Australia.

Why Operate as a Sole Trader?

It is fairly usual for people beginning a small business to set up as a sole trader. This is due to the fact that it is by far the simplest and least expensive business form to establish.

Other benefits of working as a sole trader include:

Because there are few legal and tax difficulties, it is simple and inexpensive to set up.
You have entire ownership, control, and management of the business, allowing you to run it as you see fit without interference from other business partners.
Because there are no special restrictions that apply to sole proprietors, the reporting requirements are limited.
You keep any business profits after taxes as well as any money you gain after taxes if you sell the business.
Tax losses can be offset against any other income you earn (subject to certain non-commercial loss rules);
As an individual, you are eligible for the 50% capital gains tax discount on money you gain from the sale of a capital asset (such as goodwill).

What Are the Disadvantages?

While operating as a sole trader can be a low-cost way to start a business, there are a number of issues to consider. These businesses face a number of difficulties, including:

Sole proprietors are legally liable for the entirety of their business, including all financial aspects. In the event of an obligation or debt, your personal assets may be at danger.
Sole proprietors are unable to raise funds by selling stock in their company. Instead, you can raise funds through lender-provided funding.
The procedure of selling a sole trader business is complicated.
A sole proprietorship’s debts and losses cannot be shared with business partners.
Operating a firm in collaboration with others frequently provides collaborative benefits that single proprietors do not have.

Ways To Overcome The Challenges

The challenges that sole traders encounter are consistent, regardless of the industry in which they work. Many businesses in the home renovation sector (particularly tradies) operate as sole traders, benefiting from this easy and cost-effective business structure. Many aspects of running a firm are often beyond their scope of expertise. When running a business as a sole trader, the owner controls and manages the company. This includes legal duties for all parts of the firm, as well as complete responsibility for debts and losses.

So, how can a sole trader overcome the daily challenges of personal effectiveness while managing all aspects of their business? Having a current functional business plan, accounting and business processes, as well as marketing strategy, is often helpful. The cycle of systems and processes is put to the side as the firm grows and consumers become more demanding of the quality product or service being offered. Making certain changes to the business operations will help to alleviate some of the difficulties.

Business Plan
An effective business plan will provide direction and a sense of strategy. Although it may appear to be a time-consuming activity, making time to write a business strategy is essential. The majority of the information requested is simply about the business’s operations.

Systems and Processes
It is critical to have operating systems that automate administrative tasks. Being complacent and failing to put these mechanisms in place amounts to crisis management. Standardizing processes enables business owners to achieve success through an automated method.

Marketing Strategy
When there is a lot of work in the pipeline, it is tempting to put marketing on the back burner. Accepting the notion that “we have enough work” is a bad idea to have. Marketing tactics must be active and in place at all times in order for a firm to be successful. Selling is a skill in and of itself. Every company is in the business of selling something. You simply do not have a business if you are not selling. Delivering a superior product or service necessitates first-rate customer service. Customer satisfaction and repeat business are critical to success, and they must be measured. There is a need to obtain a new client for every 10% of the client base that is lost due to low satisfaction.
Outsourcing a company’s marketing can result in greater outcomes and a sense of comfort that the company’s growth has been placed in the hands of specialists in this industry.
Once a business owner has identified the areas that are not within their skill set or require special attention, measures may be put in place to actively advance the company towards becoming more efficient. Continuing to deal with factors outside of a sole trader’s skill set will result in the continuation of the adverse cycle.

What Are Other Business Structure Options?

There are two common alternatives to operating as a sole trader:

Setting Up a Partnership
In a partnership, the partners jointly own the business and its assets. It also implies that the partners are equally liable for any indebtedness. As a result, there is opportunity to share earnings and losses with others involved in the operation of the business.

Creating a Company
A company is a separate legal entity distinct from you that is governed by ASIC. This division allows you to be more flexible in the following areas: handling your company’s affairs; profit distribution; and safeguarding your assets. It also lessens your personal liability for corporate debts and obligations.

Final Thoughts

Because of the flexibility and minimal administration and start-up costs, operating as a sole trader might be an appealing business structure. However, it is critical to consider the drawbacks, particularly the challenges you may experience, such as: trying to build and grow the company; raising funds; and the risk of personal accountability for the company’s obligations.